What Is SBA Loan?

Written by Robert Ferry on May 11, 2022
What Is SBA Loan?

Small businesses often come across a challenging situation of shortage of funds during different phases, from start-up to expansion. Moreover, they also require funds to meet unexpected circumstances. In such cases, funds must be available to them at the right time, in the right amount, and on more terms that are accessible and acceptable.

So, if you are a small-business owner in America, you may need immediate funds to meet your business needs. For example, you might need financial resources to meet the high seasonal demand. Moreover, you may need additional funds if you are going to launch a new product and you want to go on a market campaign.

Similarly, if your business has been hit by a disaster or a pandemic like Covid-19, you can get quick and flexible loans as per the requirements of your business. However, you can get this financial assistance in SBA loan programs, and you have to qualify for such loans before you get these SBA loans.

Are you wondering what SBA loans are and how they provide relief to your business? Then, we have got you covered. In this blog, we will walk you through different types of SBA. Moreover, we will guide you on which loan plan is best for your business. So, let's explore this exciting discussion!

What is SBA Loan for financing a small business?

Small Business Administration (SBA) in the USA provides loans to finance a small business to get through its immediate financial needs to help a company thrive. These exclusive loans eliminate the financing obstacles of eligible micro-enterprises by providing them with short-term and long-term loans.

SBA loan program requires a personal guarantee of owners who enjoy 20% ownership rights in a business. Moreover, the worthiness and credibility of these loans are higher as the US government backs them. If you default on your loan, SBA ultimately repays 85% of the loan. So, it is a secured loan in every possible way.

Different banks, credit unions, and private lenders provide these loans to sole traders and entrepreneurs to meet their unexpected financial needs.

Why Does Your Business Need An SBA financing?

Small businesses experience many challenges when they are short of funds and financial resources. An entrepreneur might consider SBA loans when they need funds to administer and run their business smoothly.

Unexpected Expenditures

During business activities, some machines depreciate, and you need funds to buy new working capital to make your business process work smoothly. Moreover, you might have receivables due for different reasons. It is also possible the shipment of some products has been delayed.

Whatever the reason, your business needs financial resources to meet the unexpected expenditures. Therefore, you can get an SBA loan quickly from banks on flexible terms and conditions and competitive rates.

Grow Your Business

Are you going to launch a new product, or do you want to run a marketing campaign to capture a new market? You might need SBA loans for the expansion of your small business. Similarly, if your business is in E-commerce, you can conveniently get SBA loans from commercial banks on easy terms and conditions.

Business Costs

Lastly, if your finances fail to pay your team or your employees as you cannot get some receivables on time from different sources, you can get quick financial help in the SBA loan program and pay your team on time. Similarly, if you need loans to fulfill certain costs that you are currently unable to meet, SBA Small business loans will come to your rescue at lower interest rates.

What are Business Needs Covered under SBA Loan?

A commercial bank, providing small business financing, covers a range of business needs in their different categories. For example, if you choose a lender and apply for a loan by specifying the purpose of your loan, they will guide you on which SBA loan plan is best for you. Moreover, they will inform you that a specific loan plan will not work for you based on particular business requirements.

However, three main categories can help define which business needs SBA loan program covers different types.

Circulating/Working/Revolving Capital

Sometimes, small businesses cannot fulfil their short-term liabilities and cash requirements. Therefore, they need some debt or loan to complete these short-term expenses like commercial mortgage loans. For example, cash is required for short-term daily expenditures. Similarly, a company with seasonal products and services must purchase inventory to match the high seasonal demand.

On the other hand, short-term debts and liabilities require working capital. So, we can say that a business cannot run its business without completing its working capital requirements. This is the reason small business loans are provided to those companies short of working capital to manage their business smoothly.

Fixed Assets

When a Business thrives, they need to expand its business by purchasing fixed assets. For example, they want to install a new plant, buy a piece of new equipment or remodel your current business. Similarly, if you are in the construction business or real estate, you are eligible to receive a secured small business loan.

Disaster Assistance

The Disaster Assistance loans help the businesses recover from any physical damage or financial loss. SBA's loan programs are offered for companies in disastrous conditions and need loans to survive and revive their business activities.

However, SBA lends money to those companies and homeowners where a disaster has been declared. For example, SBA provided loans to small businesses and homeowners during Covid-19 when the pandemic hit their business activities severely.

COVID-19 EIDL Program

During the Pandemic, SBA provided loans to small businesses by introducing a special loan package named Covid-19 Economic Injury Disaster Loan (EIDL). The companies received loans up to $2 million for 30 years. EIDL program was a long-term loan given at an interest rate of 3.75% for businesses and a 2.75% fixed interest rate for the non-profit organization.

There was no penalty prepayment for this loan, and the companies paid all the loans before the loan's maturity. However, the companies can no longer borrow money from SBA under this program.

IS COVID-19 EIDL Program Still Active?

SBA EIDL loan is no longer active since January 1st 2022. Moreover, SBA has stopped accepting applications for the increased Covid-19 EIDL loan from May 6 2022. However, SBA funded these loans at a fixed rate of 3.75% for businesses and at a SBA loan rate of 2.75% for non-private organizations.

What are the Types of Small Business Loans?

If your small business needs financial assistance, you need to know about different SBA financing. So that you apply for the right Small Business Administration as it will increase the probability of winning an SBA loan quickly and conveniently. Moreover, you can get the required amount quickly, fulfilling your financial gap to meet your business expenses.

SBA 7(a) Loans

SBA 7(a) loans are one of the best financial products of the SBA as it offers loans small business for a period of 10 to 25 years. You can repay your loan in 10 - 25 years if you have borrowed money for your working capital and fixed assets. Besides, SBA guarantees 90% of the loan at a fixed interest rate. Mainly, this loan helps carry out the daily business expenses of a firm or company. The business owners can apply for a loan of up to $5 million. SBA 7(a) loan could be a term loan or a line of credit. You can get this loan from commercial banks, credit unions and other private lenders.

However, the terms & conditions may vary as SBA 7(a) is divided into many categories. Following are the main categories of this standard SBA loan:

Standard SBA 7(a) Loan

Standard SBA 7(a) loan can be obtained up to a loan amount of $5 million at the negotiable interest rate. After you apply for this loan, the loan will be granted within 7 to 10 business days if you qualify for the loan and agree to all the terms & conditions. The government backs 85% of the total loan, and collateral is not required for loans up to $25 000. However, if the loan exceeds this amount, the entrepreneur will have to collateralize as higher as possible to secure the loan fully.

SBA Small Loan

SBA small loan can be obtained up to a loan amount of $350 000. SBA provides a guarantee or cover of 85% of the loan up to $150 000. Moreover, if you take a loan higher than $150 000, the lender covers only 75% of the total amount. The entrepreneurs do not need to provide collateral for loans up to $25 000. However, a lender will demand collateral for loans between $25 000 to $350 000.

SBA Express Loan

The lender expedites the loan process with a turnaround time of 36 hours if your business needs urgent funds. In other types of SBA loans, the typical turnaround time is 5 to 7 business days. You can obtain this loan for up to $500 000 with a 50% guarantee.

No collateral is required for loans up to $25 000. However, you have to collateralize your assets for loans of more than $25 000 and up to $350 000.

Export Express Loan

Export Express Loans provide loans to exporters to finance their debts and loans. The exporters apply for an SBA loan following their loan documentation plus SBA procedures. The collateral decision depends on the policy of SBA for the non-SBA-guaranteed loans.

An export business can get a loan amount of up to $500 000 with a 90% SBA guarantee. The turnaround time is quick. A company can get a loan within 24 hours after the lender approves the application.

Export Working Capital

Export Working Capital obtain loans for their potentially increasing sales and sales revenues. If their sales are likely to grow, they need funds to finance their accelerated level of sales. For export working capital, the enterprise can receive a loan of up to $5 million with a 90% guarantee of SBA. The lender issues the loan within 7-10 business days.

Loans for export working capital require the owner's personal guarantee with 20% ownership in the business. Moreover, the export receivables and inventories are the sources of collateralizing in this specific category.

International Trade

International Trade loans are long-term financing for businesses with ever-increasing sales and exports. To expand their business, they need investment in fixed assets, and to meet their increasing sales, they need funds to carry out the expenses of working capital.

International trade loans are provided for up to $5 million. The lender ensures a 90% guarantee of the government in case you default on your business. The maturity time is ten years for working capital and 25 years for real estate loans.

How Can One Choose Small Business Administration Loans?

Look at the following comparison of different types of SBA 7(a) Loans. It will help you get what you are looking for. You need to consider the purpose of the loan, loan maturity, interest rate, turnaround time and collateral requirements. On the other hand, you can get the professional services of banks to help you decide on the type of financing you need.

Specifications LoansLoan AmountSBA Guarantee (%)Revolving Lines of Credit (Years)SBA Turnaround timeCollateral
Standard SBA Loan5 million85% (up to $150,000 75% (More than $150 000)10 5-10 daysFor loans Over $350 000
SBA Small Loan$350 00085% (up to $150,000 75% (More than $150 000)-5-10 daysFor loans Over $350 000
SBA Express Loan$500 00050%736 hours$25000 to $350 000
Export Express Loan$500 00090% (up to $350,000 75% (More than $350 000)724 hoursYes
Export Working Capital$5 million90%12 months or less5-10 daysYes
International Trade$5 million90%Ten years, 25 years for commercial real estate5-10 days-

SBA Express Loans

With up to $500,000, small enterprises can apply for SBA express loan for working capital and commercial real estate. Moreover, they can use this financial relief to expand their business. SBA Express loans are faster to achieve and ensure you get funds within 36 hours of the application approval.

SBA 504 Loans

Business expansion requires considerable sums of money, and you cannot expand your business unless you have access to a more significant amount of money. For example, you might need money to buy new equipment, machinery, land, and other facilities to thrive your business. In this case, you can apply for SBA 504 loans with access to $5.5 million. The repayment period varies from 10 to 25 years, depending on the size of the financial package you have applied for.

SBA Microloans

A small business can have access to $50,000 due to the seasonal business needs - for example, you want to build a business stock up ahead of the time to meet the higher seasonal demands. Inventories, supplies, working capital, and machinery are the reasons to apply for this loan. Moreover, these loans target the marginalized sections of society like women, minorities, and other lower-income people.

SBA Disaster Loans

If your business has been hit by an unfortunate incident like a declared disaster, you can repair the damage partially with a long-term SBA disaster loan. So, you can get this loan up to an amount of $2 million at the lowest possible rate of at least 4%. Moreover, this disaster loan matures in 30 years.

SBA interest Rate & Loan Fee

Small Business Administration charges different interest rates. These rates are determined by the size of the SBA loan and the duration of a loan. Following is a list of current standard levels of interest rates on various SBA financing

SBA LoansInterest Rates
SBA 7(a) Loan5.50% - 9.75%
SBA CDC/504 Loan4.51% - 4.63%
SBA Disaster Loans4.00% without credit and 8.00 % with credit

Moreover, different SBA 7(a) loans have variations in interest rates as the loan size differs. The current prime rate for all the SBA 7(a) loans is 3.25%. Another interest rate level may be up to the maximum SBA interest rate. Let's check out this list also!

SBA LoansInterest Rates for Seven Year LoansInterest Rates for More than Seven Year Loans
Up to $25 0007.50%8%
$25 000 - $50 0006.50%7%
$50 000 or More5.50%6%
Source: Wall Street Journal

Similarly, interest rates for other types of loans like SBA Express Loans and SBA Export Express loans have varying interest rates. For loans up to $50000, the interest rate is 9.75% for the SBA Express Loans. The interest rate is slightly lower to 7.75% for loans more than $50 000. These loans are up-to-date according to the April 2022 updated rates.

Small Business Administration determines these interest rate levels by Prime rate and small markup. Small business financing ensures the loan has the maximum possible interest rate. On the other hand, Wall Street Journal determines the prime rate. Different base rates are one-month LIBOR with a 3% adjustment. Inter-bank lending uses this base rate. LIBOR stands for London Inter banking Offered Rate.

Small Business Administration issues an SBA optional peg rate quarterly, calculated as the weighted average of federal government loans with maturities similar to SBA financing.

Similarly, SBA charges a minimal fee for the SBA loans, which need a guarantee. Similarly, the lender charges a penalty prepayment for paying the loan earlier in the first three years if the actual loan's maturity was fifteen years.

Can Anyone Get an SBA Loan? What are the SBA Loan Requirements?

Before you apply for an SBA financing, you need to ensure you meet the criteria for getting a loan. Here is a list of what qualifies for an SBA loan.

A Profit-seeking Business

SBA extends loans only to profit-based businesses and start-ups to ensure that these loans expedite their growth and revenue potential by fulfilling their financial needs on time. A registered company with all the legal documentation is eligible for getting these loans.

Operating In the US

Secondly, you can get an SBA loan if your business is operating in the US or its territories. In other words, the residents of the US or companies that are active anywhere in the US can apply for this low-cost loan when they are short of funds to meet their unexpected expenses.

Owner’s Equity

The owner's equity in the business means the owner has invested his time, effort, and money into the business. In other words, he has stakes in a company for which he will get an SBA loan to manage the operations smoothly and grow the business without any financial hurdles.

SBA Loan is the Only Option

Ensure your business manager has exhausted all other options before considering an SBA financing. If your business has an option available to fulfil its cash or loan requirements, you can confidently apply for an SBA loan. Otherwise, the lender will reject your application and will not initiate and move forward with your loan process. Similarly, you cannot get this small business financing without the exhaustion of all the business savings.

If you meet the above four criteria, the lender will ensure you get the requested amount to carry out your business operations seamlessly and efficiently. However, businesses with poor ratings on credit cards cannot qualify for SBA loans. Yet, if your business is sound fundamentally and prospects are optimistic about the growth of your business, you can still get a loan with a poor rating on credit cards or student loans.

How Does Getting a Small Business Administration Loan Work?

Private bankers and lenders provide the financing services you can apply for an SBA loan. If the loan application satisfies all the SBA loan requirements, you will get a loan from SBA loan within 7-10 business days. For SBA Express Loans, you will receive loans within 36 hours. SBA program works like a conventional loan program as banks issue this financing. However, conventional loan programs are not guaranteed by the SBA loan guaranteed program.

At the minimum interest rate, you pay back the SBA loan within the specified period. SBA provides both short-term and long-term loans from 10 years to 30 years. SBA management can also charge a service fee for managing your loan. Moreover, they also offer practice solutions for your financing requirements.

You can track your small business financing by registering for an account. After that, log in to the online portal. It helps you check the status of your loan application on the SBA website. You can also use the SBA loan calculator as it helps you in the amortization of your small business loan.

Can You Use SBA Loan for Personal Use?

SBA financing cannot be used for personal use or for investing in stocks. Financing a small business requires borrowing from a commercial bank and credit unions, the owner cannot use this financing to pay off their personal debts, mortgages or credit cards. Investing in different stocks and equities also comes under the category of personal loans and investments, so you cannot use small business financing for the payment of debts on cards, a mortgage, investments and personal savings. For more information, you can get advice from the banking companies to use the SBA programs at best.

Pros and Cons of SBA Loans

Let's now dive into the pros and cons of SBA loans, and you need to consider them before you make a final decision!

ProsCons
Flexible T&CsHigher Credit Worthiness
Lower Interest RateLethargic Application Process
Customized Loan AmountPersonal Guarantee
Loan For a Variety of ReasonsDown payment
Backed by GovernmentCollateral
Longer TermsStandard Eligibility Criteria
No Additional Fee 

Different SBA loans come with their advantages and disadvantages. So, we can say each plan provides you with various benefits and some strict restrictions. For example, a borrower has to agree upon collateral for getting a loan. Other programs may require down payments before the loan. So, each plan has slightly different requirements that distinguish them from other plans.

Conclusion

An SBA loan is a relief loan for small businesses offered with lower fees and interest rates. Moreover, government support makes this loan credible and safe. Besides, small businesses cannot survive without financial support during their business journey.

If your business needs an SBA loan to meet its daily-to-daily expenses and tolerates damage, you can check different types of SBA loans and then apply for an SBA product that meets your requirements at best. So, we can say that SBA loans are an ideal choice for running and managing your business operations smoothly and without an interlude. Moreover, you can expand your business by increasing your fixed assets with the help of an SBA loan. However, you must get guidance on which SBA loan will work best for your business needs.

Article written by Robert Ferry
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